Japan's Nikkei fell 1.6 percent on Friday to cap its biggest weekly loss in three months, as lower commodities prices weighed on energy-related stocks and spurred profit-taking after a recent rally.
News the previous day that China's economy grew a robust 9.8 percent in the fourth quarter, while inflation barely slowed, raised concern the government will tighten monetary policy to cool the economy, sending prices of oil, copper and gold sharply lower.
Market players said the commodities sell-off was a perfect excuse to pocket profits, after the market had gained around 13 percent since the start of November on a rally triggered by foreign funds aggressively adding laggard Tokyo stocks.
"The market has been seriously overheated since December and 80 to 90 percent of participants were waiting to take profits after the rally. This started on Thursday and sped up today," said Masayoshi Okamoto, head of dealing at Jujiya Securities.
"Defensive shares that underperformed the recent rally like pharmaceuticals and the electric and gas sector are gaining today, showing a change of funds allocation in the market." One such defensive stock, Tokyo Electric Power, was among the biggest gainers on the Nikkei 225. The utility rose 1.4 percent to 2,004 yen on volume exceeding three times last month's average.
By contrast, the mining sector, badly hit by the drop in commodities prices, became the third-worst performing subindex on Tokyo's main board with a 3.3 percent fall. Sumitomo Metal Mining was the worst performer on the Nikkei, losing 5.4 percent to 1,368 yen.
Technical factors showed a weakening of sentiment as the benchmark Nikkei broke through important technical support levels. It sank below the 10,420 level, where December futures and option prices settled, and then its 25-day moving average at 10,400. It ended the day down 1.6 percent to 10,274.52, marking its biggest daily fall in two months. The broader Topix index lost 1.8 percent.
Volume was high, with around 2.7 billion shares changing hands on the Tokyo Stock Exchange's first section, above last week's average of 2.3 billion. "We are entering a correction here, but it's not something overly worrying, and the benchmark will probably pick up again and rise towards April," said Mitsuo Shimizu, deputy general manager at Cosmo Securities.
Among energy-related shares, which had led the Nikkei's recent rally, Japan's biggest trading house Mitsubishi Corp fell 4.5 percent to 2,273 yen. It was the second-most actively traded stock on the Tokyo Stock Exchange's main board. Fellow trader Mitsui & Co shed 3.3 percent to 1,393 yen.
Bucking the trend was NEC Corp Japan's largest PC company rose 2.1 percent to 244 yen after a newspaper report, later confirmed by Reuters, said it was in talks with China's Lenovo about a joint venture in personal computers.
"Demand for PCs is weakening with the advent of smartphones and tablets," said Tomomi Yamashita, fund manager at Shinkin Asset Management. "As they seek a survival strategy, it is positive that they are looking to a growth area like Asia, rather than choosing a domestic partner." NEC was the second-biggest gainer among the Nikkei 225 components and traded at 3.7 times its average volume last month.
Inpex Corp, Japan's largest oil and gas developer, fell 3.2 percent to 497,500 yen after oil prices slumped about 2 percent on Thursday on a sell-off sparked by an unexpected rise in US crude stockpiles and worries that China may tighten monetary policy to fight inflation. GS Yuasa Corp, Japan's top car battery maker, fell 4 percent to 580 yen after a report that Mitsubishi Motors Corp will use lithium-ion batteries made by Toshiba Corp in an electric vehicle set to go on sale in the autumn.